Cyprus Tries to Rework Divisive Bank Tax

Cypriot ministers rushed on
Monday to revise a plan to seize money from bank deposits as
part of an EU bailout, in an effort to ensure lawmakers
supported it in a vote later in the day.

Cypriot ministers rushed on
Monday to revise a plan to seize money from bank deposits as
part of an EU bailout, in an effort to ensure lawmakers
supported it in a vote later in the day.

The weekend announcement that Cyprus would impose a tax on
bank accounts as part of a 10 billion euro ($13 billion) bailout
broke with previous practice that depositors' savings were
sacrosanct and sent a shiver across the bloc, causing the euro
to tumble and stock markets to dive.

Ahead of the vote in parliament, the government was working
on a plan to soften the blow to smaller savers, by tilting more
of the tax towards those with deposits greater than 100,000
euros ($130,700) - many of them Russians, eliciting an angry
reaction from President Vladimir Putin.

The government says Cyprus has no choice but to accept the
bailout with the levy on deposits, or go bankrupt.

A Cypriot government source told Reuters the introduction of
a tax-free threshold for smaller bank deposits was under
discussion but not yet agreed.

The euro zone has indicated that changes would be acceptable
as long as the return of around six billion euros is maintained.
If the Cypriot parliament votes the deal down, the euro zone
would face a real risk of being dragged back into crisis.

"It is up to the government alone to decide if it wants to
change the structure of the ... contribution (from) the banking
sector," European Central Bank policymaker Joerg Asmussen, who
was pivotal in the weekend negotiations, told reporters on the
sidelines of a Berlin conference.

"The important thing is that the financial contribution of
5.8 billion euros remains," he said.

Residents on the island emptied cash machines to get their
funds over the weekend. The move also unnerved depositors in the
euro zone's weaker economies and investors fearing a precedent
that could reignite market turmoil that the European Central
Bank has calmed in recent months with its pledge to do whatever
it takes to save the euro.

The euro fell before tempering losses. European
stocks did similarly, dropping two percent before more
than halving losses.

In the bond market - often the most reliable guide to euro
zone stress - safe haven German Bund futures shot up while
Italian equivalents dived, suggesting some concern that Cyprus
could infect its larger neighbors.

"The crisis is back," one bond trader said.

Brussels has emphasized that the measure is a one-off for a
country that accounts for just 0.2 percent of European output.
The worst fear is that savers in other, larger European
countries become nervous and start withdrawing funds, although
there was no immediate sign of that on Monday.

U.S. economist Paul Krugman wrote in The New York Times:
"It's as if the Europeans are holding up a neon sign, written in
Greek and Italian, saying 'Time to stage a run on your banks!'"

PUTIN ANGRY

Cyprus's banking sector dwarfs the size of its economy and
its banks have been severely hurt by exposure to much larger
neighbour Greece.

Its open economy has meant that its banks also attract cash
from Russians. Moscow is considering extending an existing 2.5
billion euro loan to help bail the island out and said it had
come to no decision.

Russian President Vladimir Putin criticised the bank levy as
unfair and setting a dangerous precedent.

"While assessing the proposed additional levy on bank
accounts in Cyprus, Putin said that such a decision, should it
be made, would be unfair, unprofessional and dangerous," Kremlin
spokesman Dmitry Peskov told reporters.

Approval in Cyprus' fractious 56-member parliament is far
from a given: no party has an absolute majority and three
parties say outright they will not back the tax. A vote
initially planned for Sunday was rescheduled to give more time
to build a consensus.

Faced with a growing public backlash, Cypriot finance
ministry officials began discussions with lenders on Sunday to
lessen the blow for smaller savers.

On Sunday, a source close to the consultations told Reuters
authorities were hoping to cut the tax to 3.0 percent from 6.7
percent for deposits under 100,000 euros. The rate for deposits
above that would then be jacked up to 12.5 percent from 9.9
percent.

Cypriot President Nicos Anastasiades, a conservative elected
just three weeks ago, said in a TV address that the tax was an
alternative to a disorderly bankruptcy. It was painful, but
"will eventually stabilise the economy and lead it to recovery".

Savers who lost money would be compensated by shares in
commercial banks, with equity returns guaranteed by future
revenues expected from natural gas discoveries, Anastasiades
said. But many legislators remain unconvinced.

"Essentially parliament is called to legalise a decision to
rob depositors blind, against every written and unwritten law,"
said Yiannakis Omirou, speaker of parliament and head of EDEK,
the small Socialist party. "We refuse to subscribe to this."